Dollar’s strength sparks calls for interest rate cut

Misa Han

The chance of a Reserve Bank of Australia cash rate cut this year remains close to zero, but it has not put off some investors from calling for more easing to bring down the dollar and support the economy.

The stubbornly high Australian dollar is letting the economy down by causing high unemployment, low credit demand from businesses and stunted export-led growth, and the Reserve Bank of Australia should rethink its position on the interest rate, investors said ahead of the Reserve Bank of Australia's monthly board meeting on Tuesday.

Late Monday, the Australian dollar was buying US93.41¢, remaining firmly above US92.00¢, where it has been trading since March.

But UBS interest rate strategist Andrew Lilley said the chance of any interest rate cut was "very close to zero".

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Market consensus is the RBA will start lifting the key cash rate over the next six to twelve months, in the first or second quarter in 2015. Goldman Sachs became the last major financial house to ditch a prediction of a cash rate cut this year following the RBA Governor Glenn Stevens' testimony last month. The investment bank is now forecasting an interest rate rise in the fourth quarter of 2015.

UBS expects the RBA to increase the rate to 2.75 per cent in May 2015 followed by a further rise to 3.00 per cent in June on the back of positive labour data.

RBA governor Glenn Stevens flagged last month at the House of Representatives Standing Committee on Economics in Brisbane there will be no easing of the interest rate despite the exchange rate remaining uncomfortably high.

"Admittedly, the exchange rate ... is probably not doing as much as it might usually be expected to do in achieving balanced growth," Mr Stevens said.

"Australian government have continued to borrow at or around the lowest rates since Federation. Similarly, funding costs for financial institutions have been declining.

"This, and an increase in competition to lend in an environment of still fairly moderate credit growth, has contributed to a reduction in the rates on housing and business loans."

But the market forecast has not dissuaded some investors from pushing for an early interest rate cut. Investors point out falling commodity prices, a declining gap between local and overseas bond interest rates and the stronger US dollar have failed to lower the value of the local currency.

But other experts were on the more cautious side and said interest rate cuts should be saved for any shocking offshore events.

"It is not necessary at this stage and should only occur if there was some unforeseen shock from offshore. It is more likely the cash rate will begin to rise slowly in the first half of next year, but only after the Fed begins its policy normalisation process," CIMB equity strategist Shane Lee said.

Schroders head of Australian equities Martin Conlon said lower interest rate could result in a string of undesirable side effects.

"There is ample evidence that lower interest rates are fuelling nothing other than increasing asset prices, suppression of yields and misallocation of capital," Mr Conlon said.

"Although the high Australian dollar undoubtedly causes the RBA some consternation, exacerbating an already significant global problem by following the herd does not seem a defensible solution."